Borrowing And Leverage: Lessons For The Next Generation

One of the most common questions I get asked by other parents when they find out what I do for a living is, “What are the most important lessons I should teach my children about borrowing?” While there is no simple answer to this question, there are a few basic tenets that will stand the next generation in good stead. The most important of these is understanding the difference between good debt and bad debt, as well as how leverage should- and should not-be used.

- BY MEGAN LAPPIN, HEAD OF SPECIALISED LENDING, STANDARD BANK WEALTH AND INVESTMENT

Avoid Borrowing For Lifestyle Spending

The first lesson I taught my children was to save up for lifestyle spending. Avoid borrowing for anything you consume or that exclusively depreciates, and that does not have an income stream attached.

After you have set aside your long-term savings every month, put some money into a separate high-interest-bearing account designated for treats, and save until you have enough.

There are no benefits to borrowing for lifestyle spending, other than immediate gratification. In fact, there is a significant downside. Paying off a holiday that is long in the rear-view mirror or a car that has lost its worth by the time it is paid off does not feel good.

Your home is different in that it should, at a minimum, hold its value. Other than that, though, borrowing for lifestyle spend can have a seriously negative impact on your financial well-being and your ability to invest and grow wealth.

Deploy Your Resources Wisely

The second lesson is this: it does not matter how wealthy you are, you have limited resources.